I. INTRODUCTION - Buying or selling a closely held business, including the purchase of a division or a subsidiary, can be structured as (i) a statutory combination such as a statutory merger or share exchange, (ii) a negotiated purchase of outstanding stock from existing shareholders or (iii) a purchase of assets from the business. The transaction typically revolves around an agreement between the buyer and the selling entity, and sometimes its owners, setting forth the terms of the deal.

Purchases of assets are characterized by the acquisition by the buyer of specified assets from an entity, which may or may not represent all or substantially all of its assets, and the assumption by the buyer of specified liabilities of the seller, which typically do not represent all of the liabilities of the seller.2 When the parties choose to structure an acquisition as an asset purchase, there are unique drafting and negotiating issues regarding the specification of which assets and liabilities are transferred to the buyer, as well as the representations, closing conditions, indemnification and other provisions essential to memorializing the bargain reached by the parties. There are also statutory (e.g., bulk sales and fraudulent transfer statutes) and common law issues (e.g., de facto merger and other successor liability theories) unique to asset purchase transactions that could result in an asset purchaser being held liable for liabilities of the seller which it did not agree to assume.

These drafting and legal issues are dealt with from a United States (“U.S.”) law perspective in (1) the Model Asset Purchase Agreement with Commentary, which was published by the Mergers & Acquisitions Committee (formerly named the Negotiated Acquisitions Committee) (the “M&A Committee”) of the American Bar Association (“ABA”) in 2001 (the “Model Asset Purchase Agreement” or the “Model Agreement”); (2) the Revised Model Stock Purchase Agreement with Commentary, which was published by the M&A Committee in 2010 (the “Model Stock Purchase Agreement” or the “RMSPA”); and (3) the Model Merger Agreement for the Acquisition of a Public Company, which was published by the M&A Committee in 2011 (the “Model Public Company Merger Agreement”). In recognition of how mergers and acquisitions (“M&A”) have become increasingly global, the Model Asset Purchase Agreement was accompanied by a separate M&A Committee volume in 2001 entitled International Asset Acquisitions, which included summaries of the laws of 33 other countries relevant to asset acquisitions, and in 2007 was followed by another M&A Committee book, which was entitled International Mergers and Acquisitions Due Diligence and surveyed relevant laws from 39 countries.

A number of things can happen during the period between the signing of a purchase agreement and the closing of the transaction that can cause a buyer to have second thoughts about the transaction. For example, the buyer might discover material misstatements or omissions in the seller’s representations and warranties, or events might occur, such as the filing of litigation or an assessment of taxes, that could result in a material liability or, at the very least, additional costs that had not been anticipated. There may also be developments that could seriously affect the future prospects of the business to be purchased, such as a significant downturn in its revenues or earnings or the adoption of governmental regulations that could adversely impact the entire industry in which the target operates.

The buyer initially will need to assess the potential impact of any such misstatement, omission or event. If a potential problem can be quantified, the analysis will be somewhat easier. However, the impact in many situations will not be susceptible to quantification, making it difficult to determine materiality and to assess the extent of the buyer’s exposure. Whatever the source of the matter, the buyer may want to terminate the acquisition agreement or, alternatively, to close the transaction and seek recovery from the seller. If the buyer wants to terminate the agreement, how strong is its legal position and how great is the risk that the seller will dispute termination and commence a proceeding to seek damages or compel the buyer to proceed with the acquisition? If the buyer wants to close, could it be held responsible for the problem and, if so, what is the likelihood of recovering any resulting damage or loss against the seller? Will closing the transaction with knowledge of the misstatement, omission or event have any bearing on the likelihood of recovering?

The dilemma facing a buyer under these circumstances seems to be occurring more often in recent years. This is highlighted by the Delaware Chancery Court decisions in IBP, Inc. v. Tyson Foods, Inc., in which the court ruled that adverse developments did not constitute a material adverse change that would give the buyer a valid basis to terminate the merger agreement and ordered that the merger be consummated, and Frontier Oil Corp. v. Holly Corp., in which the court ruled a target had not repudiated a merger agreement by seeking to restructure the transaction due to legal proceedings commenced against the buyer after the merger agreement was signed. While these cases are each somewhat unique and involved mergers of publicly-held corporations, the same considerations will generally apply to acquisitions of closely-held businesses. In the event that a buyer wrongfully terminates the purchase agreement or refuses to close, the buyer could be liable for damages under common law for breach of contract.

The issues to be dealt with by the parties to an asset transfer will depend somewhat on the structure of the transaction and the wording of the acquisition agreement. Regardless of the wording of the agreement, however, there are some situations in which a buyer can become responsible for a seller’s liabilities under successor liability doctrines. The analysis of these issues is somewhat more complicated in the acquisition of assets, whether it be the acquisition of a division or the purchase of all the assets of a seller.